BlackRock’s Koesterich Sees U.S. Growth Disappoint on Spending

Growth in the U.S. may disappoint in the first half of 2013 as higher taxes reduce consumer spending, according to BlackRock Inc., the world’s biggest money manager.

Investors holding more U.S. equities than the benchmark they track should reduce exposure as volatility will likely increase with the deadline for automatic federal budget cuts approaching, said New York-based Russ Koesterich, the chief investment strategist at BlackRock. Republicans and President Barack Obama are seeking to assign blame for who would be at fault if the cuts, known as sequestration, take effect. That approach signals a deal before the March 1 deadline is doubtful.

“A lot of the risk we’re seeing in the near term, both around the headline events of the sequester and budget debates, but also on the growth side probably stems from the U.S.,” Koesterich said at a briefing in Sydney. “Part of what we’d suggest again is lowering the allocation a bit to the U.S. and second of all, being cautious of the parts of the market that are dependent upon U.S. consumption.”

BlackRock favors equity holdings in smaller developed markets including Canada, Australia, Switzerland, Singapore and Hong Kong. These nations emerged from the financial crisis with lower debt levels, stronger labor markets and better long-term prospects than the U.S., parts of Europe and Japan, he said.

Stocks Sink

The Standard & Poor’s 500 Index sank 1.2 percent yesterday, the most since Nov. 14. The Chicago Board Options Exchange Volatility Index, VIX, which measures the cost of using options as insurance against losses in the S&P 500, rose the most in 15 months yesterday.

Stocks fell after Federal Reserve minutes showed a debate over the pace of central bank asset purchases that aim to stimulate the economy. It may be four to five years before the central bank restores normal monetary policy in the U.S., Koesterich said.

When Congress returns from a recess next week, Senate Democrats are planning a vote on a $110 billion proposal that would end some farm subsidies, impose a 30 percent minimum tax rate on the highest earners and delay the cuts until 2014. That would meet Obama’s requirement that higher taxes for top earners or companies be part of a plan to delay the cuts.

Congress should replace sequestration with spending cuts and no new revenue, Republicans maintain, because more than $600 billion in tax increases on top earners took effect last month. Republicans control the House and have the ability to block Senate Democrats from acting unilaterally.

“We’d be a little bit cautious over the near-term because of this, not that I think there’s going to be a dire event but there will be some headline risk and volatility around it,” Koesterich said.

The U.S. economy will grow 1.8 percent in 2013, slowing from a 2.2 percent pace last year, according to the median forecast of economists polled by Bloomberg News.

Before it's here, it's on the Bloomberg Terminal.